Gain a better understanding of the power of : MTEF for better planning and budget allocation PBB for improving efficiency of input use and effectiveness of programs Gain a clear understanding the differences to the traditional approach Start addressing the practicalities involved in moving to a mature MTEF and PBB by planning & phasing the reforms ( starting with the pilot followed by gradual implementation by stages over the next 5 years) The outputs should be a start to planning the phasing of the reforms over the next five years
There are at least 5 stages in developments of performance budgeting in Australia that is evident in this slide Stage 1 – Introduce the concept of program budgets and define all expenditures into program budgets and running cost budgets Stage 2 – Provide at the same time as stage 1 training to line Ministries (This was the Financial Management Improvement Program) Stage 3 – After bedding in the concepts and training, provide incentives to perform by introducing and progressively increasing operating cost flexibility. Continue training at each stage of reform Stage 4 – constantly reviewing the performance frameworks and mechanisms – early tools included Program Evaluation Plans and detailed involvement by Finance in managing these Plans (similar to the model now in South Africa). More recently there are Strategic Reviews conducted by Dept of Finance that are commissioned by the Government. Stage 5 – review the legislation to provide for even greater operating flexibility than the running cost reforms to the mid 1990s but also requiring greater accountability. An even greater focus on the management of resources including capital was facilitated by the expansion in the information available arising from adopting accruals reporting and accruals budgeting. I now want to elaborate quickly on some of these steps and then go into the detail of what was required in these steps.
When the Forward Estimates became the preferred system of outlays control (mid 1980s) Departments were required to translate their institutional and line budgets into program structures and into running costs/non running cost categories . This set the framework for a later focus on performance against objectives and performance indicators. Before any serious requirements for performance were implemented the following staged steps were also taken Financial management and training of line agencies was undertaken by the Department of Finance Performance indicators were defined (i.e. efficiency indicators and effectiveness indicators) against which performance was to be measured (more on this later) Appropriations were presented on a program and running cost basis
In the earlier graphic of the stages of PBB reforms we said that the third critical stage was to grant greater operational flexibility to Chief Executives of Department’s and agencies. This is the most important part of the PBB reforms in Australia. Therefore I want to spend a little more time on this stage compared to the others. Economists refer to production functions, which represent the relationship of the mix of inputs to produce outputs at given prices. Where the production function allows substitution of inputs, profit maximising or cost minimising agents will always respond to relative price changes of inputs by changing the mix of their inputs. Economic agents that do not vary their inputs will be inefficient and incur higher costs than is optimal. Operating cost flexibility refers to flexibility that program managers were given to change the use of inputs within a “running cost budget” to maximise government services or to minimise costs. A number of the reforms of the late 1980’s and 1990’s refer to grouping together the budgets for various inputs aimed at giving more flexibility to managers to substitute between inputs. The “quid pro quo” required was accountability for more efficiency, and this efficiency was taken through an annual efficiency dividend repaid to the Government.
Note that from the late 1980’s there was a distinction between running costs and non-running costs (we termed the non-running costs as program costs). Operating cost flexibilities were granted to managers through the Running costs Budget. In this example of an Appropriation for a line ministry in 1988-89 you can see at the top there is an amount of funds appropriated for running costs. In this slide you can also see the appropriations to this Department for 3 of the 7 programs administered by it in 1988. In this example, the Health Advancement Program had eight sub programs. Running costs were narrowly defined then (to salaries and goods and services excluding legal, property operating, repairs and maintenance and minor capital expenses), but gradually the running cost budget was broadened to allow much more freedom to substitute inputs in the production of outputs. This is evident from the next slide
Overtime, more and more flexibility was granted to managers. This example highlights that in the beginning, some “running costs” were appropriated elsewhere to another department. This example shows what happened to Repairs and Maintenance appropriations. In the late 1980s Repairs and Maintenance was not a part of the Running cost budget of agencies. Instead Repair & Maintenance costs were appropriated to the Department of Administrative Services who did the repairs and maintenance for all departments and agencies. As part of the Running Cost reforms, these budgets were reallocated to the Departments to control and manage and then rolled into running costs to give greater flexibility to CEOs in the use of the inputs available to him. A similar story can be told for legal expenditures which in the late 1980s were appropriated to the Attorney General’s Department. By the mid 1990’s these budgets were reallocated to the Departments to control and manage and then rolled into running costs.
Efficiency dividends have been very popular with Cabinet. They claw back some of the budget which makes the pool available for new spending much bigger. An efficiency dividend can only be applied when the managers have flexibility to manage the inputs. Otherwise the effect of an efficiency dividend is to reduce the funding needed to deliver outputs.
This slide completes the picture for Stage 3 and shows the current terminology where funds are appropriated either as Departmental or Administered expenses. These terms of Departmental and Administered are broadly similar to the “running cost” and “non-running costs” of earlier times. They are defined in terms of expenditures under the control of managers and those under the control of Government respectively. The Chief Executive Officer has the flexibility to shift resources between Departmental Outcomes, but must be accountable to the Parliament as to why he has made such a shift. There is no flexibility to shift Administered funds between Outcomes. This distinction has been in place since the adoption of accruals budgeting since 199-2000.
There were a lot of lessons learnt over the years. The frameworks and processes were changed over time. They were refined with regard to: Who uses the performance information? The main users were : Line ministries for operational purposes and reviewing the effectiveness of programs The Parliament, mainly to ensure efficient and effective use of the monies appropriated by it to Departments for delivering programs Tools used by Central Agencies and Government early tools included Program Evaluation Plans but these had problems. More recently there are Strategic Reviews conducted by Dept of Finance that are commissioned by the Government
Once a performance based MTEF was put in place it was possible to build on the requirements for accountability & performance. The nature of some of the changes in Australia are set out in this slide.
The information in this slide summarises what is presented by Customs in this year’s Portfolio Budget Statements for Customs. It indicates that Customs management is a significant user of the performance information, from many sources available, and that management uses it to improve its services (I want to speak more on Australian Customs’s concern to serve its clients when we look at the KPIs that have been defined for the Indonesian Customs agency). In addition to management being a user of performance information it is worth noting that the Portfolio Budget Statements are submitted to both houses of the Parliament. The intent of these statements is to provide accountability to the Parliament, as is evident in the next slide.
KEEPER OF THE FRAMEWORK Government and Minister of Finance: Department of Finance issues guidance on the framework and reporting as an agent for the Government OWNERS OF THE FRAMEWORK Parliament, who uses the information as a means of accountability Line Ministers, who use the information as a means for evaluating the effectiveness of Ministries programs & policies Management Heads of line ministries, who use the information as a means of improving the efficiency of their agencies
It is interesting that some comments were made in the interviews of the last two week (across both Bappenas and the Ministry of Finance) about the need for leadership, about the culture needing to change, and about how the controls that currently exist being too restrictive to allow the line agencies to manage. These same issues confronted Australia in the mid 1980’s. Above all what happened in Australia was that contrary to previous cultures of control, and strictly applying the rules, Finance took the decision to let go. More than that it decided it had to be the lead agent of change. Finance changed its thinking and became innovative. It allowed the managers to manage. In fact it was active rather than passive and trained and educated agencies in how to manage. This meant it had to gradually relax the traditional controls. Some of the changes in controls are illustrated in the slide.
It is recommended that the Ministry for Finance take the three steps indicated. Adopt a budgeting system with Firm Forward Estimates, preferably with three forward years Create a system to let the managers manage Create a system to measure performance and carry out evaluations I now want to talk more about the detail in each step.
Australian Performance Based Budgeting (PBB) – an outline of the steps taken over several years
AUSTRALIAN PBB REFORMS – anoutline of the steps taken over severalyears Presented by Pat McMahon Budget Advisor, Australian Department of Finance and Deregulation
Aims of the next two sessions:• Gain a better understanding of the steps Australia took in its PBB reforms (1st Session);• Examine some practical examples of how PBB could be applied in Indonesia (2nd Session); and • This afternoon we will address MTEF and then start addressing the practicalities involved in moving to a mature MTEF and PBB
Graphic of five stages taken in implementing & improving Performance Based Budgeting in Australia1985 1990 1995 2000 2005 1. Program budgets Accrual-based outcome budgets 3. Operating Cost Flexibility 4. Program Evaluation Plans 4. Strategic 2. Financial Management Improvement Program Review Initiative 5. New Financial Management & Audit Acts 5. Charter of Budget Honesty Act
Stages 1 & 2: Implement concepts and FinancialManagement Training (from the mid 1980s) Stage 1: Initial implementation of a framework. – Specification of programs, objectives and performance indicators; and – Reporting, budget estimates and appropriations presented on a program (“non-running cost”) and “running” cost basis. Stage 2: Financial management training of line agencies. – Financial management education and training of line agencies (conducted by Department of Finance).
Stage 3: Introduce operating cost flexibilities –“running cost reforms” (from the late 1980s) • Greater operating cost flexibility for chief executives has been the most important part of PBB reforms. – It was from small beginnings, gradually broadening “Running cost budgets” & new laws to provide greater flexibility, i.e.: ▪ Rolling “Property Operating”, “Repairs and Maintenance”, “Legal” and “Minor new capital” expenditures into “Running Cost Budgets” (early 1990’s); ▪ Amending laws: New financial management and audit acts to give greater powers to CEOs of Departments (mid 1990s); ▪ Replacing “Running Costs” with “Departmental” (end of 1990’s upon the introduction of accruals budgeting).
Stage 3. Appropriations split by “running costs”& “non-running costs” from 1988-89
Stage 3. More flexibility by expanding the runningcost budget: rolling in Repairs & Maintenance1988-89 Budget: Repairs and Maintenance appropriations to Dept of Administrative Services By 1994-95 Budget: Repairs and Maintenance costs were reallocated to line ministries and appropriated within their “Running Costs” appropriation. Same for some other costs rolled into running costs (i.e. legal, property expenses, capital).
Stage 3. Other flexibilities and returns – Allowing carry forward of unspent running costs other than salary to the next year & to bring forward expenditure (e.g. to 2%) – Expecting agencies to make efficiencies and return an efficiency dividend to Government (e.g. 1 % a year).
Stage 3. The latest evolution - to“Departmental” and “Administered”
Stage 4. Ever changing review and evaluationframeworks First phase – Portfolio Evaluation Plans (PEPs)• Evaluation in 1995 after 7-8 years showed a number of problems: – Many program objectives ill defined - often stated processes not outcomes being sought by the government – Portfolio Evaluation Plans increasingly became an irrelevant process to be endured by agencies but not used by agencies or CabinetSecond phase – Outcomes & Outputs Framework from late 1990s• Greater focus on outcomes• Greater focus on relevance to Agencies for managementThird phase – Strategic Reviews commissioned by Cabinet from mid 2000s
Stage 5. Requirements for accountability &performance increased Requirements for performance & accountability has increased throughout the period since mid 1980s including: – New laws increasing accountability of agency chief executives for efficient, effective and ethical use of resources – Charter of Budget Honesty Act increasing the accountability of Governments – Audit committees established in each agency
Stage 5. Who now uses performanceinformation & evaluations? 1. ManagementFrom Australian Customs Service Portfolio Budget Statement• Performance is subject to internal and external audits, performance audits by Auditor General and regular management reviews of performance information• Customs also collects complaints and compliments from their clients to judge compliance with their client charter• Customs also participates in informal international benchmarking programs from time to time
Stage 5. Who now uses performanceinformation & results of evaluations? 2. Parliament
Stage 5. User Guide Statement of aPortfolio Budget Statement to theParliament “The purpose of the 2008-09 Portfolio Budget Statements (PB Statements) is to inform Senators and Members of Parliament of the proposed allocation of resources to Government outcomes by agencies within the portfolio. Agencies receive resources from the annual appropriations acts, special appropriations (including standing appropriations and special accounts), and revenue from other sources. A key role of the PB Statements is to facilitate the understanding of proposed annual appropriations in Appropriation Bills No. 1 and No. 2 2008-09 (or Appropriation Bill [Parliamentary Departments] No. 1 2008-09 for the parliamentary departments). In this sense the PB Statements are Budget related papers and are declared by the Appropriation Acts to be ‘relevant documents’ to the interpretation of the Acts according to section 15AB of the Acts Interpretation Act 1901. The PB Statements provide information, explanation and justification to enable Parliament to understand the purpose of each outcome proposed in the Bills.”
Who now uses performance information &evaluations? 3. Strategic Reviews by Cabinet Under the Australian system Cabinet is not the main user of performance information• The use of performance information and evaluations by Cabinet in the Budget process is limited to strategic issues• Cabinet can, and does, ask for strategic reviews • Department of Finance will use performance information to support savings proposals in the Budget process where there is evidence that programs are performing badly
The Role of the Australian Dept of Finance -leader of financial management reform Innovation and reform in management was strongly encouraged • Introduction of MTEF & PBB – Followed by continuous improvement & incentives to perform: – Being prepared to accept a balance between the “questioning” role and “letting the managers manage” – this was not easy for a Finance department but it was necessary to get performance. – Allowing carry forward of unspent administrative funds other than salary to the next year & to bring forward expenditure (e.g. to 2%) – Expecting agencies to make efficiencies and return an efficiency dividend to Government (e.g. 1 % a year).
What worked well in Australia and why? What has gone well? 1. MTEF involving firm forward estimates/ Running costs and devolution of responsibility – Followed by accrual reporting & then accrual budgeting Why has it gone well? 1. The adoption of firm forward estimates linked to the budget was a source of greater predictability to Governments & line managers – it gave the capacity to better plan & manage – Predictability created the climate and expectation for performance 2. Finance provided leadership: It drove reform from mid 1980s on.
Three possible areas for the IndonesianMinistry of Finance to focus onStep 1: adopt a budgeting system with firm Forward Year Estimates split into well defined programs and further split into – “running costs”, with well defined efficiency and effectiveness indicators; and – “non running costs” with well defined effectiveness indicatorsStep 2: provide financial management and performance training for line ministriesStep 3: create incentives to let the managers manageStep 4: create a system to measure performance/evaluations